The Securities and Futures Commission (SFC) statement of 28 March 2019 reminds parties of the legal and regulatory requirements applicable when engaging in security token offerings (STOs) and reminds investors to be aware of the risks associated with virtual assets, such as tokens.

The SFC states that STOs are typically specific offerings structured to have the features of traditional securities offerings “and involve Security Tokens which are digital representations of ownership of assets (eg, gold or real estate) or economic rights (eg, a share of profits or revenue) utilising blockchain technology.”

Furthermore, Security Tokens are likely to be classed as "securities" under the Securities and Futures Ordinance (SFO) and therefore will be subject to Hong Kong’s securities laws.

Where Security Tokens qualify as “securities" any person or intermediary that markets and distributes Security Tokens (whether within Hong Kong or targeting Hong Kong investors) is - in the absence of an exemption - required to be licensed or registered under the SFO or risk committing a criminal offence.

The statement further notes that Security Tokens would be regarded as "complex products" thereby being subject to additional investor protection measures.

The SFC also makes clear its expectation that intermediaries observe requirements similar to those set out in its statement of 1 November 2018.

Those requirements relate to:

Selling restrictions (for example that Security Tokens should only be offered to professional investors),

Due diligence (such as assessing “the background and financial soundness of the management, development team and issuer as well as the existence of and rights attached to the assets which back the Security Tokens”, and scrutinising any whitepaper and relevant marketing materials, and ensuring that all information is “accurate and not misleading”), and

Information for clients (ensuring that all information is “clear and easily comprehensible”, and that clients are provided with “prominent warning statements” addressing the risks of investment).

Intermediaries are advised to discuss with the SFC in advance any proposed activities relating to STOs, and are further reminded that a failure to implement adequate systems and controls may result in disciplinary action.

The statement concludes by warning investors of the potential risks involved in virtual assets, highlighting that such assets are “exposed to heightened risks of insufficient liquidity or volatility, opaque pricing, hacking and fraud.”

The statement warns that these risks also apply to Security Tokens and that investors may be exposed to “significant financial losses” in trading Security Tokens.

Ultimately, the statement ends by warning investors that “if they cannot fully understand the risks and bear the potential losses, they should not make an investment.”